Can I take one of my pension pots as a lump sum using flexible drawdown?

I have a small outstanding money purchase scheme pension with my employer. I am 60 and considering retirement this year. The pension pot is about £40,000.

I already draw two final salary scheme pensions which pay £19,800 per annum. I took the maximum lump sums which together with other savings give me a savings pot of £250,000 already.

My financial adviser says I can take the tax-free 25 per cent lump sum of £10,000 and move the remaining 75 per cent into my existing wrap investment fund.

Lump sum: Can I take my money purchase pension wholly as a lump sum using flexible drawdown?

Then, once my annual pension income goes beyond £20,000 next year (which presumably it will via a cost of living increase) use 'flexible drawdown' to take the remaining 75 per cent as a further lump sum.

Does that sound right? I appreciate there would be no annual income generated but I have sufficient funds for this not to be an issue.P.F

Adam Uren, of This is Money, says: Drawdown is an alternative form of retirement income to annuities and sees money taken directly from a pension, with the remainder staying invested so growth can continue during your retirement.

Unlike income drawdown, where the income
you take from your money purchase pension is capped by the Government,
flexible drawdown allows you to take as much as you want from your pot
after the age of 55.

But as your adviser has said, there are restrictions on flexible drawdown, namely that you have to have a minimum income of at least £20,000 from other pensions before you qualify.

Income from other sources, such as part-time work or investments, cannot be taken into account as they are not guaranteed. Your state pension can be used, but as you're 60 you're still several years off from getting this.

Ian Linden, of flexible drawdown provider The James Hay Partnership, said that the advice you have received from your IFA is correct, and that you'll have to wait until your pension rises in a year's time before you qualify for flexible drawdown.

You do have the option of taking £10,000 of this £40,000 pot as a tax free lump sum, and then when you reach the £20,000 income threshold next year, take the remainder of the pot, £30,000, as another lump sum.

But, it should be noted, that taking out this £30,000 will be taxed, as you'll have already reached the maximum you can take as tax-free lump sums.

What's more, if you take this all out at once in the same tax year, then your income for that year would be around £50,000, which means you'll pay income tax on a chunk of this at the 40 per cent higher rate.

An alternative could be to take the money as 'phased drawdown', say at £10,000-a-year for four years. Of this, £2,500 would be tax-free, with the remaining £7,500 taxed at 20 per cent.

In doing this as well, you will be keeping money in your pension pot for longer and as such it will be protected from inheritance tax in the event you die and it passes to your spouse.